How the renewable energy target affects the cost of living

Ross Gittins

There’s a lot of public support for the renewable energy target, which requires electricity retailers to get 20 per cent of their power from renewable sources by 2020. But now that the country is being run by climate change "sceptics", let’s get with the program. Forget the threat of climate change, stop worrying about your grandchildren and focus on what matters most: what this do-gooder scheme is doing to your cost of living.

Although before the election Tony Abbott professed support for the target, since the election he has instituted an expert review of it, headed by businessman Dick Warburton, former chairman of Caltex and prominent "sceptic".

The review commissioned a leading firm of economic consultants, ACIL Allen, to undertake modelling on the future effects of the target.

The preliminary report found that, between 2015 and 2020, the target would increase the average household electricity bill by $54 a year – a tad over $1 a week. This five-year average, however, conceals the estimation that the cost of the scheme will fall as each year passes.

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So by the year 2020 itself, the increase will have reduced to just $7 a year. By the end of another 10 years, in 2030, the scheme is estimated to be actually reducing average household electricity bills by $91 a year, or $1.75 a week.

It seems common sense that requiring electricity retailers to buy a certain proportion of their power from more expensive renewable sources – mainly wind power, but also solar – would add to the cost of their power, with the extra cost being passed on to consumers.

So why has ACIL Allen’s modelling concluded the target will add to the price of electricity initially, but eventually subtract from it? The short answer is because electricity pricing is a complicated business.

It turns out that adding to the supply of renewable energy available reduces the wholesale price of electricity. This is because the price being paid for energy being put into the national electricity grid by particular generators varies minute by minute according to the balance of supply and demand.

In the middle of the night, when little power is being used, the wholesale price is very low. But on a cold evening – or, more likely these days, a very hot afternoon –the wholesale price can be stratospheric.

The trick to renewable energy is that it tends to be available when the demand for electricity is high. Experience around the world confirms the Australia experience that renewable energy does a great job of reducing the spikes in wholesale prices on very hot and very cold days.

Another part of it is that though it costs a lot to build wind and solar generators, once they’re built there are few "variable" costs. Wind and sun are free; coal and gas aren’t. So the renewable generators offer to supply power to the grid at very low prices and this lowers the prices the coal and gas generators are able to ask for.

But none of this changes the fact that the electricity retailers have to pay for the "renewable energy certificates" that the target scheme requires them to buy. These certificates reduce the capital cost of setting up the wind and solar generators whose operations then reduce the wholesale cost of power.

So it turns out the renewable energy target scheme has the effect of reducing the wholesale cost of electricity while also adding to the costs of the electricity retailers. ACIL Allen’s modelling suggests that, for the next five years, the extra retail cost will exceed the saving in wholesale costs, but after that the saving will exceed the extra cost.

See what this means? The case for saying we must get rid of the renewable energy scheme because it’s adding too much to the living costs of struggling families has collapsed.

But there’s where the story takes a twist. Modelling of the future cost of the renewable energy target, published by an equally prominent firm of economic consultants, Deloitte, comes to opposite conclusions.

Deloitte’s modelling accepts that the renewable energy scheme is reducing wholesale costs, and roughly confirms ACIL Allen’s finding about the higher cost to household customers until 2020. But whereas ACIL Allen expects the scheme to start reducing household costs after that, Deloitte expects the cost to stay positive until 2030, causing household bills to be between $47 and $65 a year higher than if the scheme was scrapped.

Why have two leading economic consultants reached such opposing conclusions? Perhaps because Deloitte’s modelling was commissioned by the Chamber of Commerce and Industry, the Business Council and the Minerals Council.

Deloitte doesn’t conceal that its modelling is in reply to ACIL Allen’s. Would it surprise you if the fossil fuel industry wanted to see the renewable energy target abolished and was alarmed to know that modelling commissioned by the review had demolished the argument that continuing the target would add to people’s electricity bills? Now the review will be able to pick whichever modelling results it prefers.

How did Deloitte reach such different results? By feeding different assumptions into its model. It seems to have assumed the cost of wind farms won’t fall over time (which it probably will), whereas the price of gas for gas-fired generators won’t rise much (which it already has).

Regrettably, economic modelling has degenerated into a device for bamboozling the public.

Ross Gittins is economics editor.

67 comments

Ross - thanks for laying it out so clearly for us dummies, we need commentary like yours to help us cut through the rhetoric and the headlines - shame some of the others reporting put some thought into the substance rather than the headline.No matter what they attempt to do with the modelling the fact is the cost isn't that high for us to choose to dump the renewable energy targets and schemes. Deloittes reply to Allens figures are still low by comparison to the impact on families and the economy through the inaction being proposed by the government.Even someone who is a little sceptical would have to agree $50 per year is a small price to pay just in case global warming is real and we are part of the problem.Keep serving it up in plain English for us dummies we appreciate it.

Commenter

Judge

Location

Sydney

Date and time

August 06, 2014, 5:53AM

So you mean we should re introduce carbon tax at a higher price let's say 50 or 100 dollars a ton ?

Commenter

Ranger roy

Date and time

August 06, 2014, 7:10AM

Another lost opportunity of this unintelligent govt.

Apart from the slash and burn policy to the science area (as we know not even a science minister) we have put in jeopardy over 18,000 direct jobs in the solar industry alone... (not to mention wind, wave tidal etc). This is the very same area that Warren Buffett says will be the greatest business driver of the 21st century.. (he has invested more than $15 billion in the area in the last ten years) and proposes to spend more...

A report released over the last few weeks showed that in China and the USA, combined they spent over $60 billion in the last economic quarter - in Australia that figure was $40 million the lowest level since 2001 in a time when the world is moving toward low carbon economies.

Australia is about 80% service industry and we have a PM who thinks that the NBN is "wacko" and after five reports since they came to govt they have someone saying that inn essence the Labor NBN was a good idea but should have had a cost benefit analysis and run by a "major" telco (that wouldn't be the same telco that the author worked for would it?).

My point is that we have a govt who are claiming they want to create a million jobs but are putting a brake on those very industries that will be able to support those jobs. Just look at what they think is a good idea - work for the dole and applying for 40 jobs a month; both proven to be failures....

LNP = no vision, no policies, no idea...

Commenter

n720ute

Location

North Coast NSW

Date and time

August 06, 2014, 7:13AM

Ross! Great article and good comment Judge! As an economist I am only too aware how everything in modelling depends on the assumptions. And as you point out why are we not persisting with renewable energy. Both these studies show the costs are negligible. The half brains do not seem to realise that somewhere, sometime coal etc will runout. Not necessarily in our lifetime but it will. More importantly as it becomes scarcer coal will become more expensive. When that happens renewables will be heaps cheaper. Then you have the global warming thing. One of the other things you do not hear about, is fuel. We have replacements for coal and power but at this stage we do no have effective fuels for transport on which we heavily rely. We can convert coal to fuel to fill the gap until hydrogen or electric transport becomes available if it ever does. The very little difference between renewables and coal over the next decade shows shifting to renewables should be a no brainer!

Commenter

Pollyho

Date and time

August 06, 2014, 7:19AM

Economists are like politicians, they make predictions which frequently never come true,regardless of who is paying for their efforts. Ross should be more than familiar with that fact.

Commenter

SteveH.

Date and time

August 06, 2014, 7:33AM

Good article. It would be interesting to get a follow up piece discussing the likely pros and cons of increasing the renewable energy target. If there is a clear benefit to consumers in raising the RET then it will be interesting whether either major party will make it an election issue. The downside is obviously the prospect of undermining our coal industry, but I think the majority would want to embrace the new cleaner technology and say goodbye to coal. Exciting times for the renewable industry.

Commenter

Flanders

Date and time

August 06, 2014, 8:13AM

The answer to this is simple. Let natural market forces decide. That way when renewables can compete on price they will slowly take over. This is the way markets should work. Let the renewables stand on their own two feet.

Pollyho, I used to be a coal analyst. Let me tell you we are not running out of coal. We have enough for hundreds and hundreds of years.

Commenter

mh

Location

Brisbane

Date and time

August 06, 2014, 9:07AM

Its amazing how Ross yet again manages to reduce the argument to its key principals. All economists should aspire to such clarity.

It would have been good if one of the models also tried to put a value to the economy of establishing a more diversified energy mix. Surely this de-risks any transition that is likely to be imposed on the Australian economy when a global price or tarriffs are put on our very carbon intensive energy sector?

Commenter

Panaitan

Location

Sydney

Date and time

August 06, 2014, 9:26AM

What price for a cleaner, healthier environment and at the same time fighting Climate Change - $1 dollar a week. I know what my choice would be. Tony doesn't want a renewable energy industry he's looking after the coal industry and their profits. After all, he thinks "Climate Change is Crap," and we still don't have a Climate Change policy.

Commenter

Darcy

Location

Sydney

Date and time

August 06, 2014, 9:28AM

SteveH,good one, Steve.

if you have no counter argument you just attack the messenger.

So basically, you don't like the arguments put forward because it disagrees with your preconceptions of RET's role?

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